Question

JB Co. is planning to invest in a new koala theme park. The investment will generate $4.5 million p.a. for 15 years with the first cash inflow received in one year's time. The required rate of return for this type of investment is expected to be 6% p.a. for years 1-9 rising to 11% p.a. for years 10-15. What is the most JB Co. should pay for this investment now?

Answer 1

	The amount that can be paid is the PV of the cash inflows for the 15 years.
	But as the required return differs for years 1-9 and for years thereafter
	the discounting has to be done in two stages.
1]	PV of cash inflows for years 10 to 15 = 4500000*(1.11^6-1)/(0.11*1.11^6)/(1.06^9) =	$           11,268,220
2]	PV of cash inflows for years 10 to 15 = 4500000*(1.06^9-1)/(0.06*1.06^9) =	$           30,607,615
	Amount that can be paid =	$           41,875,835